Japan cheating us on social security: does the one-time lump sum make up for it?

Part 3 in the recent series.

The other day, I collated the annual figures from the Annual Statistical Supplement that the U.S. Social Security Administration puts out.

It shows that Japanese who rely on the U.S.-Japan social security totalization agreement received over $6 million from the U.S. treasury. These would be Japanese who paid into social security while covered in America, but who did not pay in the entire 40 credits (10 years — I know it doesn’t have to be exactly 10 years.)

Since October 2005, the Japanese have agreed with us to combine the periods of coverage for people who work, during their careers, in both America and Japan. One of the issues is that America collects social security as a tax–meaning that you don’t get around it. Your employer doesn’t, either, without risking tax evasion. The Japanese, on the other hand, don’t enforce their social insurance program. So both employers and employees cheat.

If you do participate in Japan, however, the Japanese will give you a partial rebate on the money that you paid in. This has been since about 1994. I think you are limited to a 36 month rebate, that you have to ask for within two years of leaving Japan. The Japanese tax this rebate, because you receive a tax deduction when you pay premiums.

So the question: If the Japanese are handing out lump-sum withdraws, doesn’t it make the whole scheme “fair”? If the Japanese hand Americans who worked in Japan $6 million in lump sums, then doesn’t that balance out the $6 million that otherwise unqualified Japanese receive from Social Security?

Ah, the many shades of gray.

The reason the analysis is false has to do with:

the time value of money; and

what is being exchanged.

When we pay out $6 million to Japanese–mostly born before the year 1949–we are not only giving back $6 million that they paid in. It’s not just their money coming back. It’s their money, plus the employers’ shares, plus a general wage-inflation factor up to age 62, plus the consumer price index. The deal is not just for one year. When we pay the $6 million, we’re also still pledging to pay this amount in the future—adjusted for inflation. If an individual Japanese does not survive beyond age 62, then that person may receive less than what they put in. (It’s a joint annuity, so the spouse would collect if there is a spouse. But I want to keep this simple.)

To put some numbers on it, I see ones like these as possible.

If a Japanese came to America in the 1980’s, and worked for 3 years at $17,500 a year, they would have paid $3,255 into general OASDI (old age and disability). The Medicare portion is gone. That was $761.25, so $4016.25 total.

We are going to index the earnings to 2011, based on 1985 as the year. So it’s a factor of 2.42. The $17,500 is counted as if it were $42,350 of earnings in today’s wages. This creates AIME (average indexed monthly earnings) of $3,529. Spending some time on the social security website, you’d find that AIME of that amount in 2011 would generate a benefit of about $1,564 at age 66, and somewhat less ($1,173) at age 62. The Japanese person, having just paid in the three years, (and needing 7 in the Japanese system) would get about 3/35ths of those amounts. (Somewhere between $100 and $134.) Remember, these are all just quickie calculations to make this all go.

Well, it’s clear that for the $4,000 taxes, we are giving back the money in less than four years. And then, we are committing to pay a life annuity beyond that. It’s worth a lot more than what the Japanese paid in, if for the simple fact that the employer had to match the contribution.

Notice, too, that we pay it out as long as, totalized, the Japanese participated 10 years. It could mean that the Japanese never even gets a Japanese benefit, since you need 25 in that one. What an irony!

So the $6 million today being paid out on this treaty is money that was paid in before, plus other money.

When the foreign person in Japan is being given lump-sum, it’s the person’s own money, and no additional contribution. The employer portion stays with the Japanese. Any money beyond the 36 months of contributions stays with the Japanese. You are made to feel that you are getting this big $7,000 check, but you are being allowed to give up an annuity that might be worth $45,000 in the future. Good luck getting that $7,000 to grow to $45,000 in today’s volatile markets. Say goodbye to the employer share, which would have been part of your annuity. Say goodbye to any additional contributions beyond the 36 months.

Is the one-time lump sum payment a deliberate scheme by the Japanese?
Probably not. It’s one of the schemes of convenience. Something that arises as practice, where the Japanese never do anything about the bad aspects of it. When the program was put into effect in 1994, there was no U.S. totalization. So if you didn’t stay in Japan for 25 years, or do a permanent residency of one sort or another, that money looked to be gone. In those days, getting $7,000 or getting nothing–seemingly ever–made the lump sum feel like quite a gift. Social Security doesn’t do that on retirement money (when you have less than 40 credits).

Today, however, lump sum makes no sense unless you have a terminal illness. Just on probabilities, you won’t. So it continues now simply as a way to cheat people from agreement-partner countries out of part of their retirement. And, again, doing it to young people–people in the 20’s or 30’s—is ideal, because they’re not even going to wince. 2050 is like some sort of science fiction fantasy idea to them. They feel rich when they get the $7,000 check.

If you ever price a life annuity in the free market, you will be surprised how much it costs to get someone to agree to pay you $100 for life. Even if you are 70 years old. A stream of income is a very valuable thing, and the only way to gain an affordable one is to start early. That’s why programs like social security work like they do.

Consider how the Japanese government lets certain employers disregard covering their foreign, totalization partner, workers in Japan; and then, the ones they do happen to cover, they allow to be cashed out in very restrictive terms. You might conclude that the Japanese government really just wants a one-way treaty: America pays to the Japanese a joint life annuity. Japan pays virtually nothing in return.

Hmmmm . . .

[Update: Which is better: $7,000 in your hands now, or a stream of income worth $45,000 (in the value of today, in so-called “real” money) in the year 2050? If you present that question to anyone younger than 30, they would probably go for the $7,000. Even the ones going around, saying about how “dedicated” they are to Japan. “We are dedicated to Japan, but we want that check when we cash out!” “We love Japan–where’s our dough?”]